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Thursday, November 13, 2014

"free" markets aren't so free:

By Gavin Finch and Liam VaughanNov. 13 (Bloomberg) -- In
an early morning chat, threesenior currency traders at some of the world’s
biggest banksweighed the pros and cons of admitting a fourth member to
theirprivate instant-message group.The traders -- from Citigroup Inc.,
JPMorgan Chase & Co.and UBS AG -- had worked together for years to
manipulate the$5.3 trillion-a-day currency market by sharing details of
clientorders and coordinating trading strategies, two people
withknowledge of a global investigation into the foreign-exchangemarket
said last year. While adding a new recruit would bolstertheir strength, they
worried he couldn’t be trusted to put thegroup’s interests ahead of his
firm’s.“Will he tell the rest of desk stuff,” Richard Usher,JPMorgan’s
chief London-based dealer, wrote in the chatpublished yesterday by the U.S.
Commodity Futures TradingCommission. “Or god forbid his nyk,” he said,
referring to theNew York trading desk.“That’s the really imp[ortant]
q[uestion],” repliedCitigroup’s London-based head of European spot trading,
RohanRamchandani. “Don’t want other numpty’s to know. Is he gonnaprotect
us like we protect each other.”The undated conversation and hundreds of
others form thebedrock of investigations that yesterday saw regulators
penalizesix banks, including Citigroup, JPMorgan and UBS, a record
$4.3billion for rigging foreign-exchange benchmarks. The transcriptsshow
traders boasting about “whacking” and “double teaming”the market and
congratulating one another when plans paid off.The fines are the first wave
of sanctions against banks andcould be followed by criminal
charges.

Core Attack

“It was an attack at the core of what the
markets areabout,” John McFall, a Labour member of the U.K. House
ofLords, said today. “It should be about transparency and servingthe
public, and on both of those grounds it was rigged. You’retalking about
culture and change. It shows we haven’t seen thatyet.”The three traders
at Citigroup, JPMorgan and UBS eventuallyagreed to let the newcomer join
because he would “add hugevalue to this cartell,” one wrote. He was admitted
for a month-long trial and told “mess this up and sleep with one eye
openat night.”While Usher and Ramchandani weren’t named in the
documentreleased by the CFTC, their identities were confirmed by
twopeople with knowledge of the probes who asked not to be namedbecause
some details of the settlement remain private. The othertraders couldn’t be
identified. Ramchandani, who was fired byCitigroup earlier this year, and
Usher, who left JPMorgan afterbeing put on leave in 2013, declined to
comment. They haven’tbeen accused of wrongdoing by authorities.

3
Musketeers

The traders, and others at banks including HSBC
HoldingsPlc and Royal Bank of Scotland Group Plc, would congregate
inchat rooms an hour or so before benchmark rates are set todiscuss
their aggregate trading positions and how to executethem to their mutual
benefit, according to statements andtranscripts released yesterday by U.S.,
U.K. and Swissregulators. The groups dubbed themselves “the 3
musketeers,”“1 team, 1 dream” and “the A-team,” Britain’s
FinancialConduct Authority said.“The trader at the center of this
investigation, verydisappointing behavior, very serious on his part,”
JPMorgan’scommercial bank chief Doug Petno said at a conference in
NewYork yesterday hosted by Bank of America Corp. “It’s a reminderthat
the behaviors of a single individual define a company andso it’s something
that we’re super focused on as a business.”

‘The Oxygen’

A lawyer
for Usher didn’t immediately respond to an e-mailseeking comment on Petno’s
remarks.The fines arose from traders’ attempts to manipulate
theWM/Reuters currency benchmark, which is used to determine thevalue of
$3.6 trillion in index tracker funds around the world.The rate, known as the
fix, is set for more than 130 currenciesby taking a snapshot of trades in
the 30 seconds before andafter 4 p.m. in London.“Foreign exchange is the
oxygen for international trade,”Bill Michael, head of Europe, Middle East
and Africa financialservices for KPMG LLP in London, said today. It’s “a
betrayalof the notion that banks will act in the best interest of
thecustomer.”From at least January 2008 through early 2012
tradersadopted an array of strategies to maximize their profits at
thefix, regulators said. If one of them had orders that ran counterto
the rest of the group, he would attempt to offload hisposition with an
unsuspecting counterpart at another bank toavoid clashing with
co-conspirators.

Traders’ ‘Ammo’

If the traders all had orders in
the same direction, theywould seek to turbocharge any price moves. In the
minutes beforethe fix, they would attempt to sniff out any banks with
largeorders in the other direction and trade with them in advance,
aprocess known in the market as “taking out the filth.” Atother times
they would trade with third parties outside the chatroom with the intention
of giving them orders in the samedirection to execute at the
fix.Sometimes they would transfer their orders, known as“ammo,” in a
particular currency pair to one trader, or divvyup the orders between two
traders who worked together tomaximize their impact on the fix, regulators
said.After establishing that they both had a lot of euros tosell in
exchange for dollars at the fix one day, Usher andRamchandani agreed to join
forces, according to a transcriptpublished by the CFTC without a date.
Usher, a former RBStrader, was the moderator of the chat room known as
“TheCartel,” people with knowledge of the matter said in
December.Ramchandani joined Citigroup’s trading desk after
graduatingfrom the University of Pennsylvania with a degree in
economics.

‘Double Team’

“Tell you what, lets double team it. How
much you got,”Usher asked about eight minutes before that day’s fix.“ok.
300. U?” his counterpart at Citigroup replied. “okill give you 500 more,”
said Usher.Even colluding with one another was no guarantee traderswould
succeed in moving the rate. The market moved againstRamchandani and Usher
that day, and they lost money, accordingto the transcript. On other
occasions they boasted of makinghundreds of thousands of dollars on a
trade.“The traders put their own interest ahead of theircustomers, they
manipulated the market -- or attempted tomanipulate the market -- and abused
the trust of the public,”FCA CEO Martin Wheatley told reporters at a
briefing in Londonyesterday, without identifying which traders he was
talkingabout. The regulator will press firms to review their bonusplans
and claw back payments already made.The fines were the largest the British
regulator hasimposed and mark the first time it has entered into a group
banksettlement.

‘Murkier Side’

Some foreign-exchange traders
became concerned that theirown communications could be problematic as their
banks preparedto settle with regulators over allegations of rigging
anotherbenchmark, the London interbank offered rate, in 2012. In Marchof
that year, an unidentified JPMorgan trader asked the bank’scompliance team
what procedures they had in place about sharinginformation in chat rooms
with traders at other firms ahead ofthe fix, the FCA’s settlement with the
bank shows.That same month Niall O’Riordan, UBS’s co-chief
currencydealer, called Bank of England official Martin Mallett todiscuss
how banks communicated ahead of the fix to seek hisadvice about whether the
chats would raise concerns byregulators, according to a report released
yesterday by thecentral bank. Mallett described the practices as “the
murkierside of our business” and raised the issue at a meeting ofsenior
foreign-exchange dealers in April 2012.Mallett was dismissed Nov. 11 for
“failure to adhere tothe bank’s internal policies,” not as a result of
theinvestigation, the BOE said.

Citigroup Fine

Citigroup, the
world’s top currency dealer, was ordered topay the biggest fine at about
$1.02 billion, according tostatements from the CFTC, FCA, the Swiss
Financial MarketSupervisory Authority and the Office of Comptroller of
theCurrency. JPMorgan will pay $1.01 billion, followed by UBS with$800
million.RBS was fined about $634 million, HSBC $618 million andBank of
America $250 million. Barclays Plc, which had beenin settlement talks, said
it wasn’t ready for a deal.More than 30 dealers have been fired, suspended,
put onleave or resigned since the probes began last year. Banks
areoverhauling how they trade currencies to regain the trust
ofcustomers. They have capped what employees can charge forexchanging
currencies, limited dealers’ access to informationabout customer orders and
banned the use of online chat rooms,people familiar with the moves said in
September.Despite the impact their behavior had on the value oftrillions
of dollars of investments around the world, thetraders regularly
congratulated each other for successfullymanipulating the market.“Well
done gents,” said one trader after one day’s fix,according to the CFTC
settlement document.“Hooray nice team work,” a trader at another
bankreplied.